Greece’s elections have elevated Syriza, a leftist party committed to higher government spending for its constituents and less cooperation with the rest of Europe. Syriza and its governing coalition might be willing to risk wrecking the Greek economy if Europe does not agree to make a large wealth transfer (in some form or another) from future European taxpayers to current Greek bureaucrats.
Amid the warnings that large costs could follow Greece’s bruited exit from the eurozone, observers should remember that there are also potential benefits.
For Europeans, what would be the cost of allowing Greece to reap the whirlwind it has sown? The chief risk is that investors would see a possible “contagion,” whereby the same disaster might play out again in Portugal, Spain, or Italy. Contagion fears led to borrowing crises in 2010, which persisted until the European Central Bank confirmed that it would be the “lender of last resort” for member governments.
A lender of last resort is a backstop against liquidity crises, which occur when a government lacks access to cash in the short run though it is financially solvent in the long run. The existential risk to a lender of last resort occurs when it (foolishly or unwittingly) starts bankrolling borrowers who are not solvent in the long run.
The crisis that Syriza is threatening is not a liquidity crisis. Syriza has no long-term plan to repay creditors; instead, it wants the rest of Europe to perpetually bankroll Greece’s bloated public sector.
The European Central Bank should reaffirm that it is a lender of last resort for liquidity crises, not a vending machine to pay out political promises. If it makes that stand, forcing Greece’s new leaders to decide whether or not to exit, the ECB would show that its role as lender of last resort is limited in scope and, thus, credible in the long run.
If the European Central Bank caves to Syriza–which ECB board member Benoît Coeuré promises it will not do–it will soon see invoices from election winners elsewhere who promise new spending paid by other people’s children.
Originally appeared on WSJ.com.
